In Valeant Pharmaceuticals’ evolution from battleground stock to full-bore Wall Street circus it is easy to forget that underneath the competing valuation narratives and regulatory drama is a real operating company. The odd thing is that down at the operating level–where drugs are made, shipped to market and sold–things don’t get very much clearer. One of Valeant’s more enduring riddles is the continued vitality of Wellbutrin XL, a drug that has been off-patent since 2006. A January Bloomberg News article ably laid out Valeant’s strategy of constantly raising prices on the drug–11 times since 2014–that underscores how revenue jumped. But looking at Wellbutrin XL’s prescription count data from the second and third quarters last year–specifically the reported revenues–some unanswered questions remain.
Shortly before 11 p.m. on February 4, Valeant Pharmaceuticals chief executive officer Howard Schiller took off from Dulles International Airport for home. It had been a long, tiring day of preparation, congressional testimony with plenty of blunt questioning and afterwards, the inevitable debriefing with his legal and public relations advisory team. It was not a lost day though: speculators in Valeant’s shares perceived Schiller as having done well and the stock price closed up $3.87, an unexpected development when a CEO is called to account for his company’s business model. He certainly helped his cause when he flatly admitted the company made mistakes and understood the pain its drug pricing policies had caused. To be sure, it did not go flawlessly — there were several broadsides landed from the likes of Congressman Elijah Cummings, the head of the House Committee on Government Oversight and Reform panel that subpoenaed him.
Valeant Pharmaceuticals is the type of company that tends to make even the simplest things complex. The contract of Howard Schiller, its new chief executive officer, is evidence the first. On January 6 Valeant’s board of directors gave Schiller the role of Interim CEO; the company previously had an hoc, three-man “office of the chief executive” created on December 28 in the wake of the disclosure that founder and then-CEO Michael Pearson had taken a medical leave of absence of indefinite duration. Notwithstanding the fact that Valeant has become the most closely followed company in the capital markets–attributable in part to the Southern Investigative Reporting Foundation’s revelations of its hidden ownership of Philidor–it was reasonable to have expected a filing several days after Schiller’s appointment that disclosed relevant compensation package details. But that announcement only came on February 1, three weeks after Schiller assumed control.
Executives at Insys Therapeutics have continued to pressure its employees to develop new ways to mislead insurance companies into granting coverage to patients prescribed its drug Subsys, even as the Food and Drug Administration’s Office of Criminal Investigations issues a stream of subpoenas to former employees. As reported in a December Southern Investigative Reporting Foundation story, Insys’ prior authorization unit (also known internally as the insurance reimbursement center) employees were trained and rewarded for saying anything, including purportedly inventing patient diagnoses, to get Subsys approved. The revelations illuminated the answer to the conundrum raised in our previous stories: how does a company marketing a standard Fentanyl spray formulation, under a strict FDA usage protocol, easily double the insurance approval rates of its more established competitors? Internal Insys documents and an audio recording of a PA unit meeting show that as recently as the late autumn executives were frantically brainstorming new ways to get around increasingly stringent pharmacy benefit manager rule enforcement. “[PBMs] had begun to deny Insys’ [PA] requests in the early autumn to the point where it was rare to get more than two dozen approvals per week for the unit,” said ex-PA staffer Jana Montgomery (a pseudonym) and something that began to accelerate after the CNBC reports came out.
The Insys that investors loved and that made its founder and chairman John Kapoor a billionaire is going away and, despite heroic efforts by company officials to rebrand it as a research and development-driven shop, its future will probably be less profitable, with little of the mercurial growth and compounding profits that defined its first four years. The Southern Investigative Reporting Foundation interviewed two dozen then-current and former Insys sales staff, as well as six doctors and their staff, and their accounts paint a uniformly grim picture of the company’s prospects. Its forecast is murky because the number of prescriptions for Subsys, Insys’ sole commercially viable product, is dropping and likely to continue to do so. The forces arrayed against Insys, from a federal grand jury investigation in Boston to, as described in a Dec. 3 Southern Investigative Reporting Foundation story, mounting insurer scrutiny of Subsys prescriptions, represent brutal, if not possibly insurmountable, obstacles. A quick glance at Insys’ financial filings from 2012, when it was committed to marketing primarily to oncologists, is proof that playing by the rules is not very lucrative.
Insys Therapeutics is a company in a great deal of trouble. The manufacturer of a Fentanyl spray called Subsys with 100 times the strength of morphine, Chandler, Ariz.-based Insys scored the top-performing initial public offering of 2013, according to CNBC. Analysts and investors adored the company’s fast sales and profit growth and dreamed of a future when Insys’ cash flow would lead to dividends and acquisitions. As Insys’ market capitalization topped $3 billion, those who got in on the ground floor, investing early on, shared in its success: Founder Dr. John Kapoor became a billionaire and a host of company insiders, led by CEO Michael Babich, became millionaires. Their joy was not to last.
Poland seems a most unlikely place for the next chapter of Valeant Pharmaceutical’s saga to play out. Weighing in at about 3% of sales, the Polish operations are seemingly a modest contributor to Valeant’s fast growing bottom line. But Valeant’s Eastern European operations have recently been the source of a good deal of message board rumor, which in turn has prompted the company to quickly respond. So the Southern Investigative Reporting Foundation set out to see whether Valeant’s units in Eastern Europe are as robust as their North American brethren. We chose Poland to start with because it’s the third largest geographic segment and, along with Russia, a core component of the company’s Emerging Markets unit (which represented 25% of sales last year.) Just as importantly, unlike Russia, Poland doesn’t have a rich civic tradition of killing investigative reporters or the people working with them.
On Valeant Pharmaceutical’s conference call on November 10, embattled chief executive Michael Pearson offered several defenses of his company’s internal controls and procedures. Similarly, in defending both himself and Valeant from the now constant drumbeat of controversy, one of Pearson’s constant refrains has emphasized his commitment to transparency. A March 14, 2014 Securities and Exchange filing suggests Pearson and Valeant have a long way to go on both of these fronts. Put bluntly, a footnote in a Valeant filing over 18 months old appears to show how Pearson made a handsome profit through what is referred to as an unspecified “error.” How handsome?
The Southern Investigative Reporting Foundation’s story looking at Valeant Pharmaceuticals’ well-concealed relationship with Philidor Rx Services, struck a nerve. Briefly, the story explored the ways in which Philidor, a specialty pharmacy whose sole customer is Valeant, used opacity and some misdirection to try and build a national pharmacy network. Additionally, SIRF uncovered how Valeant had sought to conceal its control of Philidor. A Valeant conference call scheduled for Monday morning, October 26 is designed to explain these previously hidden relationships and, more importantly, calm the very frayed nerves of its battered shareholders. But recently uncovered documents from a litigation between Philidor and R&O Pharmacy are probably going to have the opposite effect, in that they illuminate what can only be described as a bizarre effort to circumvent California regulations.
If the name Valeant Pharmaceuticals International doesn’t ring a bell, its business practices should. The Quebec-based drug manufacturer’s policy of implementing regular price increases that often run north of 100% has generated plenty of anger, a congressional investigation, constant press coverage and a subpoena from the U.S. Attorneys offices in both the Southern District of New York and the District of Massachusetts. But as strange as it may seem, a slim legal filing in California federal court is poised to make Valeant’s world rockier still. The story starts 50 miles northwest of Los Angeles in Camarillo, Ca. with R&O Pharmacy, a modestly-sized operation co-owned by veteran compounding pharmacists Russell Reitz and Robert Osbakken.